Derivative Financial Instruments

12 Months Ended

Dec. 31, 2015

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivatives and other hedging contracts. To date, the Company has entered into Eurodollar and T-Note futures contracts and interest rate swaptions, but may enter into other contracts in the future.  The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.

In addition, the Company utilizes TBA securities as a means of investing in and financing Agency RMBS or as a means of reducing its exposure to Agency RMBS, and not as a hedge.The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if the Company cannot assert that it is probable at inception and throughout the term of the TBA securities that it will take physical deliveryof the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, upon settlement of the trade.

Derivative Assets (Liability), at Fair Value

The table below summarizes fair value information about our derivative assets and liability as of December 31, 2015 and 2014.

(in thousands)
Derivative Instruments and Related Accounts	Balance Sheet Location	2015		2014
Assets
Futures - Margin posted to counterparty	Restricted cash	$	8,483	$	5,174
Receiver swaptions	Derivative assets, at fair value		669		-
Payer swaptions	Derivative assets, at fair value		-		1,217
		$	9,152	$	6,391
Liability
Payer swaptions - Margin posted by counterparty	Other liabilities	$	-	$	(1,364)

Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar and T-Note futures positions at December 31, 2015 and 2014.

($ in thousands)
			December 31, 2015
			Average	Weighted	Weighted
			Contract	Average	Average
			Notional	Entry	Effective		Open
Expiration Year			Amount	Rate	Rate		Equity(1)
Eurodollar Futures Contracts (Short Positions)
2016			900,000	1.51%	0.98%		(4,718)
2017			900,000	2.31%	1.59%		(6,550)
2018			900,000	2.77%	1.99%		(7,060)
2019			900,000	2.56%	2.17%		(865)
Total / Weighted Average		$	900,000	2.23%	1.57%	$	(19,193)
Treasury Note Futures Contracts (Short Position)(2)
March 2016 10 year T-Note futures
	(Mar 2016 - Mar 2026 Hedge Period)	$	185,000	1.99%	1.95%	$	1,091

($ in thousands)
		December 31, 2014
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	Effective		Open
Expiration Year		Amount	Rate	Rate		Equity(1)
Eurodollar Futures Contracts (Short Positions)
2015	$	650,000	0.79%	0.63%	$	(1,039)
2016		800,000	1.52%	1.54%		139
2017		800,000	2.36%	2.23%		(1,041)
2018		800,000	2.94%	2.54%		(2,361)
Total / Weighted Average	$	760,000	1.88%	1.73%	$	(4,302)

• Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.
• T-Note futures contracts were valued at a price of $125.91 at December 31, 2015. The nominal value of the short position was $232.9 million.

The table below presents information related to the Company’s interest rate swaption positions at December 31, 2015 and 2014.

($ in thousands)
	Option					Underlying Swap
					Weighted					Weighted
					Average			Fixed	Receive	Average
				Fair	Months to		Notional	Pay	Rate	Term
Expiration		Cost		Value	Expiration		Amount	Rate	(LIBOR)	(Years)
December 31, 2015 - Receiver Swaptions
≤ 1 year	$	1,100	$	669	4.2	$	100,000	1.77%	3 Month	5.0
December 31, 2014 - Payer Swaptions
≤ 1 year	$	5,350	$	1,217	6.2	$	375,000	2.79%	3 Month	7.3

Gain (Loss) From Derivative Instruments, Net

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013.

(in thousands)
		2015		2014		2013
Eurodollar futures contracts (short positions)	$	(17,741)	$	(9,558)	$	4,828
T-Note futures contract (short position)		(3,887)		72		-
Receiver swaptions		(431)		-		-
Payer swaptions		(1,217)		(4,439)		-
Net TBA securities		386		-		-
	$	(22,890)	$	(13,925)	$	4,828

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments are included in restricted cash on our consolidated balance sheets.